1. State Budget Overview for the 2005 Legislative Session January 5, 2005 Eva De Luna Castro, Budget Analyst (deluna.castro@cppp.org) 900 Lydia Street - Austin, Texas 78702 Phone (512) 320-0222 – fax (512) 320-0227 - www.cppp.org

2. PRESENTATION OUTLINE: What happened last time? Current state budget picture Budget needs for 2006-07 Revenue system: current sources; options for 2006-07

3. Estimated General Revenue shortfall of $15.6 billion for 2004-05 The “Balancing” of the 2004-05 State Budget Cuts to 2003 Budget: $1.4 billion Cost shifting: $1.0 billion “Smoke and mirrors”: $1.2 billion Rainy Day Fund: $1.3 billion Federal Fiscal Relief: $1.4 billion Revenue Measures: $1.8 billion Cuts to 2004-05 Budget: $7.5 billion

4. Where Budget Cuts Were Made Health Care (not just Medicaid and CHIP, but also teachers’ and state employees’ health coverage) K-12 textbook funding; grant programs such as kindergarten and pre-K expansion grants; Tele-communications Infrastr. Fund (now funds Technology Allotment) Layoffs of state employees More details available in CPPP’s July 2004 report, at http://www.cppp.org/products/report s/budget-impact04/index.html

5. Source: Texas Legislative Budget Board, Fiscal Size Up 2004-05. State vs. Federal Funds, Current Budget

6. Source: Texas Legislative Budget Board, Fiscal Size Up 2004-05. State Budget Isn’t Alone on 2005 Agenda General Appropriations Act has to be passed by legislators to keep state services going in 2006-2007 (budget starts September 1, 2005) School Finance: equity and adequacy issues; legislators may wait for results of appeal (of State District Judge Dietz’s ruling) before acting. Or they may try to cut local property taxes by enacting or expanding state taxes (franchise tax, new business activity tax, tobacco tax, sales taxes) Higher Ed: Texas Grants and other financial aid; Top 10% Law Workers Comp reform: increasing return-to-work rates, creating physicial networks, controlling costs, limiting use of workers’ comp Other: insurance (homeowners and health); utility regulation; Texas Enterprise Fund; asbestos lawsuits; capital punishment; incarceration policies; same-sex marriage and abortion issues; water policy; tollways See House Research Organization Report, Topics for 79 th Legislature, http://www.capitol.state.tx.us/hrofr/focus/topics79- 1.pdf

7. 2004-2005 GR Budget Percent of All GR Texas Education Agency$20.6 billion35% Health and Human Services Commission$9.4 billion16 Department of Criminal Justice$4.6 billion8 Teacher Retirement System$3.8 billion6 Dept. of Aging and Disability Services$3.5 billion6 Dept. of State Health Services$1.6 billion3 Employees Retirement System$1.4 billion2 Higher Education Coordinating Board$667 million1.1 University of Texas at Austin$483 million0.8 Family & Protective Services$478 million0.8 Source: Legislative Budget Board, Fiscal Size Up 2004-05, and budget requests for 2006-07. Where 80 Percent of General Revenue Goes

9. What Texas State Government Pays For Source: U.S. Bureau of the Census, State Government Finances series. Data for 2002 for Texas, total expenditures (including trust) of $70.3 billion.

10. What Texas Local Government Pays For Source: U.S. Bureau of the Census, Government Finances series. Data for 2002 for Texas, total expenditures (including trust) of $77.1 billion.

11. Source: U.S. Bureau of the Census, State & Local Government Finances, Fiscal 2002. 50-State Ranking: 13 th 46 th 26 th 39 th 15 th 13 th 35 th 41 st 23 rd 36 th 33 rd 43 rd

12. Indicators of Texas’ Need for Public Social Services Texas US Average Texas rank % of Population under 18, 200228.0 %25.3 %3 rd Child Poverty Rate, 200322.8 % 17.7 %8 th Elderly Poverty Rate, 200313.0 %9.8 %7 th % of Under-65 Population with No Health Insurance, 2003 26.9 %17.6 %1 st % of Residents Aged 25 or over with at least a High School Diploma, 2003 77.8 %83.6 %49 th % of Residents Aged 25 or over with at least a Bachelor’s Degree, 2003 24.5 %26.5 %27 th Source: U.S. Bureau of the Census, March CPS and American Community Survey

13. Need Indicators for Tarrant County TexasTarrant County % of Population under 18, 200328.8 % Child Poverty Rate, 200322.5 % 14.8 % Elderly Poverty Rate, 200313.0 %9.0 % Overall Poverty Rate, 200316.3 %11.4 % Residents on Food Stamps, 20038.7 %4.8 % Residents receiving cash welfare, 20031.7 %1.4 % % of Residents Aged 25 or over with at least a High School Diploma, 2003 77.8 %83.7 % % of Residents Aged 25 or over with at least a Bachelor’s Degree, 2003 24.5 %27.5 % Sources: U.S. Bureau of the Census, American Community Survey; Texas Dept. of Human Services, Annual Report for 2003.

14. Biennial General Revenue % State Budget, 2004-05$58.9 billion Across-the-board 5% cut to baseline (if no exceptions were made) ($2.9 billion)-5% Major Requests for More GR: K-12 (TEA): Baseline Increase$1 billion1.8% K-12: Exceptional Items$1.3 billion2.2 HHSC: Baseline Increase$397 million0.7 HHSC: Current Svcs Exceptional Items $2.7 billion4.6 CHIP/Medicaid Shortfall for 2005$320 million0.5 Aging & Disability: Baseline Increase$232 million0.4 Aging & Disability: Exceptional Items$1.1 billion1.8 Family & Protective Services (without CPS reform) $200 million0.3 Dept. of State Health Services$163 million0.3 (continued) 2006-07: Another Tough Budget to Write

15. Biennial General Revenue % Department of Criminal Justice (avoids layoffs of 1,450 prison guards and 350 other state prison staff) $303 million0.5 Teacher Retirement System (mostly to restore teacher health benefits) $1.4 billion2.3 Employees Retirement System (mostly state employee health care) $566 million0.9 Higher Education Coordinating Board (about half is for financial aid—Texas Grants and B on Time—to offset tuition increases) $597 million1.0 New GR needed so far:$10.3 billion17.5 % The Big Unknown: GR Growth for 2006-07 (to be announced Jan. 2005) $6.5 billion ?11 % ? 2006-07: Another Tough Budget to Write

16. K-12 (TEA) Major Exceptional Items Textbooks: $387 million Guaranteed Yield Increase: $301 million; Existing Debt Allotment: $180 million; Instructional Facilities Allotment: $150 million Student Success Initiative (to prevent “social promotion”): $251 million Restorations of programs cut in 2003, such as Pre-K/ Kindergarten Grants ($7 million), High School Completion ($3.5 million), Texas Advanced Placement ($1.4 million), Technology Allotment ($12 million) GR match needed for Adult Ed/Literacy: $13.6 million

17. HHSC Major Exceptional Items Maintaining Medicaid Caseload Growth: $1.3 billion in GR Maintaining Medicaid Cost Trends: $1.2 billion Decline in match rates for Medicaid and CHIP: $111 million Restoring Medicaid rates: $177 million Restoring 5% cuts to GR: $26 million Maintaining CHIP caseload growth: $65 million; Cost trends and rate restorations: $20 million; benefit restorations $53 million Restoring Medicaid services for adults, Graduate Medical Ed: $102 million Partially restoring services for Medically Needy: $35 million Keeping HHS waiting lists from growing: $47 million; reducing waiting lists over next decade: $255 million Rate increases for Medicaid and CHIP providers: $264 million

18. DADS Major Exceptional Items Restoring entitlement growth in long-term care programs: $154 million in GR Restore 5% GR cuts: $20 million Decline in Medicaid match rate: $17 million Guardianship program (being transferred from Family & Protective Services): $12 million Restore long-term care rates to fiscal 2003 levels: $54 million Long-Term Care Provider Rate increases: $531 million Rate increase for direct care staff (nurses in State Schools, community care attendants & direct care aides): $240 million Entitlement caseload growth staffing: $24 million

19. Family & Protective Services: Major Exceptional Items $12 million in GR to restore foster care/adoption rates to fiscal 2005 levels; $39 million for foster care/adoption caseload growth Restoring 5% cuts to GR: $9 million (prevention programs) $28 million to restore lost Medicaid funding (Targeted Case Management) Adult Protective Services reform: $9 million Keeping CPS caseloads from worsening: $26 million Restore prevention program cuts: $19 million Further restoration/adjustments to foster care rates: $28 million Enhanced permanency for children: $28 million HHSC report on CPS reform, including recommended funding changes, was due by December 31, 2004; revised budget likely to be submitted based on these recommendations

20. State Health Services: Major Exceptional Items $107 million in GR to restore 5% cuts to GR: major programs include child immunizations; HIV/Sexually Transmitted Disease & Hepatitis C Prevention; TB, Hansen’s, & Refugee Health; Kidney Health; Children with Special Health Care Needs; Mental Health Services for Adults & Children; Northstar Behavioral Health; Women & Children’s Health Programs; Family Planning; Substance Abuse Prevention, Intervention, & Treatment; County Indigent Health Care; State Hospitals; Radiation Control; Food (Meat) & Drug Safety Medicaid match rates and loss of one-time funding: $8 million Texas HIV Medication program: $5.7 million General Revenue restoration for Substance Abuse programs: $10 million State facilities/infrastructure: $29 million Salary upgrades for nurses/LVNs: $10.5 million

21. Biennial GR % State Budget, 2004-05$58.9 billion Replacing Robin HoodAt least $2.3 billion4 % “Buying down” local school property taxes by 10 cents per $100 taxable value $2 billion3.4% Eliminate waiting list (30,000) for working-poor child care $73 million0.1% Reaching the national average in state/local spending from taxes $16 billion27% Other Pricetags

22. Outcome Depends on Available Revenue Comptroller will give legislators the official revenue estimate no later than January 2005 Good news: revenues for 2004 show higher-than- expected annual growth, at 6.4%, much better than fiscal 2003. Rainy Day Fund balance is back up to $878 million (Sept. 2004). Bad news: health care costs—one-third of state budget—expected to continue rising at double-digit rates Long-term structural inadequacies of state/local tax system are putting too much pressure on property taxes Heavy reliance on sales taxes also makes Texas tax system very regressive (taking more from families with the lowest incomes)

23. State/Local Taxes: Lower than a Decade Ago

24. Tax Effort Would be Even Lower if Not For Local Decisions to Fund Basic Services

25. Source: Comptroller of Public Accounts, Annual Property Tax Report; Cash Report. From a Taxpayer’s Point of View

26. From the State’s Point of View: All Revenue

27. From the State’s Point of View: Taxes Only

28. Revenue Options Likely to be Considered Cigarette tax: $1/pack increase raises $1.7 billion biennially Video Lottery Terminals: $1.1 billion biennially. “Crack cocaine” of gambling. Business activity tax: broader base than franchise tax (only applies to corporations) Sales tax rate increase — but this is extremely regressive, and TX already has one of the highest rates Sales tax base expansion (to services not covered now)